Legal Entity: Everything You Need to Know

A legal entity refers to a legally standing or lawful partnership that could be an association, a trust, a proprietorship, a corporation, or an individual.5 min read

What Is Legal Entity?

A legal entity refers to a legally standing or lawful partnership. That partnership could be an association, a trust, a proprietorship, a corporation, or an individual. All such entities are legally able to be accountable for activities against the law, enter contracts or agreements, incur and pay back debts, be sued and sue other entities, and assume obligations. While legal entities are able to do many things, a legal entity cannot hold office or vote.

Legal entities are frequently seen in scenarios and instances where an individual can take a class-action lawsuit against a company or the manufacturer that supplies the products for a company. Another scenario where the term "legal entity" applies is when every member of a band signs a contract for a record. The band is the legal entity, which is why the band members can enter a contract.

What Is a Legal Entity Identifier?

A Legal Entity Identifier (LEI) refers to an ID that is associated with one corporate entity. The LEI is a unique ID, which means that no corporate entity can have the same ID as another corporate entity. There is no universal entity ID convention in today's market. However, there are many different initiatives for regulation that are spurring the creation of a universal standard for the LEI in financial markets.

The LEI consists of 20 characters. The purpose of the LEI is to serve as a reference code to identify unique and legally distinct entities that participate in financial transactions. The LEI can also serve a role in identifying the reference data associated with these financial transactions. The two main principles of the LEI are as follows:

Exclusivity - Once a legal entity has one LEI, they cannot obtain another LEI. In some cases, an entity may port LEI maintenance to another operator. However, in the process, the LEI remains exactly the same.

Uniqueness - Only unique entities can be assigned an LEI. Once an LEI is assigned to an entity, the LEI cannot be assigned to any other entity. This is true even if the original entity no longer exists.

Why File Entity Formation?

In order to protect each of the individual owners, creating a formal entity is crucial. As a new business owner, you'll neet to take into account your company's needs, overall financial situation, and even your long-term goals.

Consider forming as a S corporation if your business has less than 70 shareholders. As an S corporation, owners are able to reduce their personal tax liabilities with any losses the business suffers. Additionally, as an S corporation, owners are only taxed on a personal level, which can greatly reduce your overall tax liability.

If there are a few owners, a partnership could be the best option. Each partnership is based on the individual involvement and level of responsibility. Choosing a partnership provides the flexibility to structure your partnership specifically to your situation.

Companies with multiple members and employees will typically fit best as a corporation. Overall, a corporation is typically reserved for larger businesses that have already established themselves. As a corporation, a business can also avoid many of the tax implications that are associated with proprietorship and partnerships. Of all the formations, a corporation is the most involved.

Forming as a Limited Liability Company is often an attractive option because it offers the best of a corporation and a partnership all rolled into one. By combining the tax benefits of a corporation and the flexibility that comes with a partnership, an LLC is the perfect package to many business owners. Additionally, many owners can not afford to take on personal financial risk. An LLC also offers protection against personal liability with respect to losses the business may face.

A sole proprietorship is a good fit for smaller businesses. The costs and record keeping are minimal, making it an attractive option for many owners. In the case of sole proprietorship and partnerships, any possible liability that the company takes on, the owners also personally assume. With a sole proprietorship, the owner is solely accountable for every aspect of the business.

If the business has multiple member-owners, a cooperative may be the best fit. A cooperative offers services to benefit all of the owners collectively.

Many times, the costs associated with forming a corporation will outweigh any future tax advantages. Additionally, the formation of a corporation often becomes much more time consuming. This is due in part to the ongoing administrational requirements.

If the business is otherwise protected, the benefits of filing, is simply not worth the expense.

Ultimately, you will need to consider each option to find the best fit for your business. Take into account your goals, both long and short-term. In a partnership, each owner's needs should be addressed. Each business is unique. Certainly, one of the formations will effectively meet your business goals and financial circumstance. Only you can determine which is ideal for your particular situation.

What Entities Are Eligible for a Legal Entity Identifier?

According to the ISO standard, only a legal entity is eligible to receive a Legal Entity Identifier. Any unique party is that is financially or legally responsible for financial transactions and their performance are qualified for an LEI. Unique parties that have the ability to enter legal contracts independently are also eligible for an LEI. Even if a unique party has been constituted or incorporated through a partnership, trust, or in some other manner, the unique party can still be assigned an LEI.

Natural persons are excluded from eligibility for a LEI. However, supranationals and governmental organizations can get an LEI. Individuals are eligible for an LEI if they act in a business capacity. However, these individuals need to meet certain conditions.

How to Obtain a Legal Entity Identifier

A legal entity can obtain an LEI through self-registration. An entity or its authorized representative needs to be eligible for an LEI code. If the legal entity is eligible for an LEI code through its authorized representative, the representative needs to provide permission explicitly before the legal entity can register for the LEI code.

The LOU will need to collect reference data from the entity. This reference data includes the address and the name of the list. The entity that is seeking the LEI will need to confirm or certify this reference data. Entities will need to verify the accuracy of the reference data periodically. The LOU will need to use reliable sources to check all entries before publishing the reference data and the LEI. Therefore, the legal entity should expect a delay after requesting the LEI before publication of the LEI. The legal entity will need to pay a fee after being issued the LEI code. There is also a fee associated with yearly certification and the validation of the reference data.

Get Legal Assistance

If you are looking for help with choosing or forming a legal entity as well as general advice along the way, you can post on UpCounsel to receive free custom quotes from the top 5% of attorneys with experience in your area. Customers have typically saved up to 60% on legal fees in comparison to large law firms. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe and Twilio.

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